Lesson 76 - Intermediate Accounting Course 

76. Sensitivity Analysis and Scenario Planning

Sensitivity Analysis and Scenario Planning are crucial techniques in financial modeling, helping businesses and investors assess risks, opportunities, and decision-making under uncertainty.

1️⃣ What is Sensitivity Analysis?

Sensitivity Analysis evaluates how small changes in key variables affect a financial outcome.

📌 Example:

• How does a 1% increase in costs impact net profit?
  
  

• What happens if sales drop by 5%?
  
  

How It Works:

✔️ Identify key assumptions (e.g., revenue growth, interest rates, tax rates)
✔️ Adjust each variable one at a time
✔️ Measure the impact on net income, cash flow, or valuation

💡 Excel Approach: Use Data Tables or Goal Seek

= Revenue × (1 + Growth Rate)

= Cost × (1 + Cost Increase)

💡 A highly sensitive variable causes large changes in outcomes with small input changes. 

2️⃣ What is Scenario Planning?

Scenario Planning analyzes multiple possible future outcomes by adjusting multiple variables at once.

📌 Example Scenarios:

• Best Case: Sales ↑10%, Costs ↓5%
  
  

• Base Case: Normal growth assumptions
  
  

• Worst Case: Sales ↓10%, Costs ↑5%
  
  

How It Works:

✔️ Define different scenarios
✔️ Adjust multiple financial assumptions
✔️ Analyze the impact on profit, cash flow, and valuation

💡 Excel Approach: Use Scenario Manager

3️⃣ Differences Between Sensitivity Analysis and Scenario Planning

4️⃣ Why Are These Important?

✅ Helps in risk management
✅ Prepares for worst-case situations
✅ Guides strategic decision-making